Ireland may be forced into a second bailout by mounting loan losses in its banking system, according to Deutsche Bank AG.

Ireland’s bailed-out banks may need capital to cover as much as 4 billion euros ($5.1 billion) more bad-loan provisions than assumed in stress tests last year, Deutsche Bank analysts David Lock and Jason Napier said in a report published today.

“A new, even modest, increase in capital requirements could deter sovereign investor participation and tip the balance in favor of the sovereign requiring a second loan program,” the Deutsche Bank analysts said.

Ireland’s government, which sought a bailout in 2010, has injected about 63 billion euros into its banks in the past three years. The government’s plan for new personal insolvency laws introduces risks even as politicians and the financial regulator seek to avoid widespread residential mortgage debt forgiveness, Deutsche Bank said.

“Although resilient during 2009 and 2010, mortgage arrears have risen sharply over the past year, house prices are continuing to fall, market liquidity is limited, and over half of customers are now in negative equity,” the analysts said. “We fear the size of negative equity balances for some mortgage holders may greatly reduce their incentive to cooperate, pushing them towards default.”

Ireland’s largest 10 consumer lenders, including four overseas-owned banks, lost around 117.8 billion euros on soured loans in the four years through December, according to data compiled by Bloomberg News. Deutsche Bank today downgraded Bank of Ireland, the only Irish lender guaranteed in 2008 that has avoided state control, to sell from buy.

‘Substantial Buffer’

Speaking at Bloomberg Link’s Ireland Economic Summit in Dublin on May 16, Michael Torpey, who helps manage the government’s bank stakes, said that the country’s lenders have a “substantial buffer” of capital to withstand growing mortgage arrears. Finance Minister Michael Noonan said in an interview at the time that the banks “as of today” don’t need any more capital.

The current aid program is due to run out at the end of next year, and the country’s debt agency has said it hopes to start selling treasury bills within the next three months, as a step towards regaining full market access.

“We do not envisage a second bailout,” a spokesman for Noonan said today in a telephone interview. “We’re meeting all our program targets and are working towards getting back into the markets in 2013.”

The yield on Irish October 2020 bonds rose 4 basis points to 7.41 percent. While Irish borrowing costs have risen as the Greek political crisis unfolded this month, it’s still about half the euro-era record of 14.1 percent in July.

Greek Events

“Ireland has made huge progress over the last year. It is really a pity what is happening in Greece is spoiling all this,” said former European Central Bank Executive Board Member Lorenzo Bini Smaghi in an interview with Dublin-based Newstalk radio aired today. “Without the Greek events, I think Ireland would be able to come back to the markets.”

The government said voters need to approve a European Union stability-pact referendum on May 31 in order to access the permanent euro-area bailout fund, the European Stability Mechanism, if needed.

Some 62 percent of Irish people who expressed a preference intend to vote in favor of the compact, Paddy Power Plc, the Dublin-based bookmaker said today, citing a poll carried out by Red C, the market research firm.

Ireland may get a second aid package, even if voters reject the treaty, economists at Citigroup Inc. in London said today.

“We believe a second program would be forthcoming if requested, probably initially without private sector involvement unless the Irish government itself insisted that PSI is needed, which is unlikely in our view,” said Citigroup economists including Juergen Michels and Michael Saunders in a note. “With Ireland’s high government debt level and low potential growth, the risk of eventual government debt restructuring (PSI, Official Sector Involvement or both) also is likely to persist.”